Insomma

Toxic Assets: Is the Proposed Cure More Toxic Than the Assets?

What's so toxic about the banks' toxic assets? As I understand it, they consist, mostly, of overleveraged, securitized mortgages. Historically, the average rate of default on home mortgages has been quite low. For the short and medium-term this rate is likely to grow and, undoubtedly, many of the underlying mortgages in mortgage-backed securities are underwater. However, mortgages are long-term instruments and, in a few years, most morgaged homes are likely to be worth once again more than the mortgages and the value of mortgage-backed securities is likely to be back to nearly par. The current problem is that, since no-one wants these securities at present, thay have no market value and banks holding them are virtually bankrupt because of the requirement to mark them to market. But today's market value is way lower that the real value. Allowing banks to value their toxic assets realistically, rather than at market, would be the simplest way to solve the problem but governments always try to scratch their right ear with their left hand: it makes it look like harder work. The main problem with private-public partnerships that will be set up to buy toxic assets is that they will give the greedy jerks who created the present mess an opportunity to earn huge profits with little risk and government fianancing. Since this would be a disgrace that rightly would come back to bite the rear end of the Administration, anyone who was involved in any way in the creation and marketing of the toxic assets should not be allowed to participate in their leveraged purchase at a discount. The very likely large profits to be derived by this operation should be made available only to others and, possibly, through some form of mutual fund, to small investors who sustained heavy losses and who are never close enough to the table to get any of the good food.

Our Elected Hypocrits

What a show today, watching our elected representatives to Congress spit fire and brimstone at Liddy for A.I.G. agreements entered into by Paulson, the previous administration and Congress, before Liddy ever came on board. Liddy is the only one who looked honest and good on the air. It was even more fun than watching the self-righteous "talking heads" who know how to inflame public opinion with little or no knowledge for the sake of increased audience. Congressmen and Senators see their job as bringing the bacon to their constituencies through pork, making certain that statements no one listens to are on record and posturing on the air, whenever possible, in order to score points at home and achieve their main goal: getting re-elected. Where were they when the TARP was passed without string attached and Paulson chose to save his friends at Goldman Sachs by sinking Lehman Brothers? Where were they when Washington catered to Wall Street, deregulating everything and thus bringing back a 1929 scenario? We should form public committees to question all our elected representatives and pass judgement on their performance and, if necessary, with the power to jail them for the ruin they rain upon us regularly. The adage used to be: " A good beginning is one thousand lawyers at the bottom of the ocean." A really good beginning would be to drown with them most Congressmen and Senators as well as many journalists, particularly television hosts of political shows; not all of them, maybe, but many for sure. Fired up by the press we are approaching mob rule and our elected representatives, instead of leading the nation, are bent on following and satisfying the mob. Let's not generalize and throw the baby out with the bath water. Let's take the time to identify malfeasance and then punish it as deserved and needed.

Obama's Dwindling Credit Line

There are many reasons I voted for Obama. I want reinstated regulations that protect the public from unsound and risky fianancial practices. I want new regulations that protect shareholders from being robbed blind by management, with the collusion of management-friendly Boards of Directors. I want fair rules by which to play the capitalist game. I want a more liberal attitude towards social issues and rigorous separation between Church and State. I want a reduction in waste and a health care net for all that will not bankrupt the country for the benefit pharmaceutical and health insurance companies. I realise that all this cannot be attained without some tax increases and I am prepared to pay my share. What i did not bargain for, what would stop my support and what would sink the Obama presidency is an attempt to redistribute income substantially. We are, have been and wish to go on being a capitalist country, not a socialist one and, already, we tax the wealthiest among us more and the poorest among us less than most Western countries. We are one of few countries with a staggering death tax and crippling state and city income taxes on top of the federal one. We may consider whoever earns annually $250,000 as rich, rich enough to be overtaxed. This, however, depends on where one lives. While in Podunk it may represent a fortune, in New York City for example, where State and City taxes take another 14% slice and where the cost of living is much higher, it is barely enough to make ends meet. The one thing Obama got right is taxing hedge funds and other such income as ordinary, rather than as capital gain. If one is in the hedge fund business whatever he earns is and should be taxed as ordinary income and the annual income of those guys is $250,000 with two, three, or even four zeros added at the end. But  my rediness to pay additional taxes goes hand in hand with Obama's promise of fiscal responsibility and the curbing of earmarks. I am not willing to see the additional taxes I pay go to finance bridges to nowhere in countless counties and states.  If Obama wants to keep my support, and that of most other moderates, he will have to use his authority and popularity to put an immediate stop to earmarks and defuse the impression that he is, after all, a classic left-wing democratic demagogue whose goals are big government and income redistribution. Most of his goals seem to be worthwhile and admirable; unfortunately, in today's economic environment, in spite of their urgency, they cannot be attained all at the same time. The Republicans failed because they deregulated recklessly and with too much haste, without fully considering the consequences. If Obama will try to do all, and pay for all, at once he shall fail as well. With the Republicans in disarray, he has the opportunity to set the stage for a prolongued Democratic hegemony but, if he goes too far left, the stage he will set will be for an overwhelming Republican victory in 2012.

Good Old, Good Old...

It sure hasn't taken President Obama long to prove that Democrats - just like Republicans - are unable to get away from demagoguery and cannot help but put their ideology ahead of logic. Although it hurts, I understand the need to roll back President Bush's tax cuts, bringing the top rate back to 39%. But limiting deductions on mortgages and charitable contributions to 28%? Think of the poor bloke who took out a $1 million mortgage, conservative in view of his and his wife's salaries. He will have to pay, now, over 10% net more, even if he or his wife may have been laid-off. Is that a stimulus to the economy? No! It's just a slap in the face to someone who has put off his earning career by 6 years, has spent $300,000 (some of which he may still be repaying) to get an education and has worked like an ass for the first few years out of university, on call 24/7.Well done Mr. President! As for charitable contributions, I have already trimmed drastically my annual list in order to compensate for 7% I will no longer be able to deduct; I am certain I am not the only one. Great help to the Arts, charities and to education, where most of my contributions go. Plus sa change plus c'est la meme chose. Politicians cannot help themselves and if you think you see a lamb it is, most likely, a wolf wearing fleece.

Tra Il Dire E Il Fare...

An Italian adage suggests: "Tra il dire eil fare, c'e di mezzo il mare" - "there is an ocean between saying and doing". President Obama started his tenure in fifth gear, issuing some bold executive orders dealing with ethics and executive compensation for companies availing themselves of tax payers money. But what about his often-repeated promise of by-partisanism and of doing away with 'business as usual' in Washington?  It is true that he won the election and that a majority of voters favors a departure from the failed policies of then last 8 years; it is true, as well, that what the Republicans are taking issue with items in the stimulus package that amount to a very small percentage of the whole. However, I am starting to doubt his wisdom in chosing Rahm Emanuel, who said, unabashedly, that it is a crime not to take full advantage of a serious crisis. If Obama wants to act quickly and in a by-partisan way to stimulate the economy, his first concern should be to keep House Democrats in line and to tell them clearly that he will not accept any pork in the stimulus bill. $200 million for free condom distribution? This may, indeed, stimulate, but certainly not the economy. Money for Hollywood? I know that many stars have been important supporters but the last thing we need is tax payers money for more maga-pictures, starring overpayed pretty faces. If we want to help the arts, why not help Broadway, where many a show has closed down prematurely during the last few months? The President is not showing the right kind of leadership and is letting the left wing of the Democratic congress set the agenda. Should he keep going down this path, he will find out soon that popularity is fickle and he will be risking to be a one-term wonder.

The Arab-Israeli Conflict

After 60 years of conflict, peace will be hard to come by. Undoubtedly, Israel has made many mistakes that have exacerbated the situation but the main problem has always been an Arab world lack of desire for peace and the absence of a reliable Palestinian counterpart that could guarantee the implementation of a peace treaty. For the first thirty years the Arab world refused to accept the UN partition resolution and concentrated on trying to find a way to get rid of Israel. It kept the Palestinians in refugee camps and used their plight to further its goals, both international and internal. Hatred of Israel was a convenient whipping boy to compensate for authoritarian regimes and lack of economic progress. After the Yom Kippur War, Egypt and Jordan came to the conclusion that a cold peace with Israel was more advantageous; however, they encouraged - Egypt in particular - anti-Israeli street sentiment. As for the Gulf states, they pulled back from outright confrontation and financed terrorist groups on condition that they refrain from acts of terrorism within their borders. Like the USA created the Afghan monster, so the Sunni Arab Kingdoms created the Islamic Fundamentalist monster. There can be no doubt that the ultimate goal of Al Qaeda is to overthrow the existing Arab regimes and substitute them with Fundamentalist ones that strictly observe Sharia. Furthermore, the minority Shiite sect, lead by non-Arab Iran, is another major threat to all the Sunni governments; that is why these regimes talk with a bifurcated tongue: officially - for street consumption - they are critical of Israel and of its forceful reactions to Palestinian terrorism. but privately they hope that Israel will succeed in doing away with Hamas and with Hezbollah, both common enemies. Immediate and long-term ceasefires, as well as a permanent peace treaty, depend exclusively on the Arab world. Were it unanimously - or almost - prepared to withdraw all support from terrorist groups and tell the Palestinians that they can count on economic and political backing only if they are willing to forgo terrorism and accept the two-state solution, hostilities would cease immediately and all efforts could be concentrated on peace and reconstruction. As for the argument being made about disproportionate response is bogus. This is not a matter of tit for tat but, rather, a matter of trying to put an end to the shelling of Israeli cities and towns near the Gaza strip and, should Israel have resorted to directing thousands of shells on Gaza, in view of the strip's population density, thousands of civilians would have been killed instead of a few hundred people, most of them Hamas terrorists. This, of course, would be welcomed by Hamas since they care only about their political agenda and consider Palestinian civilians ass an expendable commodity. Finally, the humanitarian issue, while very real, is the fault of Hamas. Had they not engaged in terrorism the border with Israel would be open and, had they used their tunnel to Egypt to bring in medicines, food and other supplies rather than weapons, there wouldn't be a humanitarian issue. The present situation reminds me of the mischievous little boy who keeps throwing pebbles at a bigger boy and, when the latter beats him up, runs to hide behind his mother's skirt crying that the bully is picking on him.

Recoup The Recoupable

I have a hard time understanding the Madoff Affair. How did a man who ran a very successful, respected and profitable business get himself into such a mess? How could his brother and his two sons - who are reputed to be very bright - not have known what was going on and that Bernard was a psychopath? How could so many august financial institutions not have figured out what the representatives of Societe Generale realized during the course of a two-day visit at Madoff's offices, after which they put his fund on their internal black list? Why did the authorities not follow up on the suggestion, made years ago, that Madoff was running a Ponzi scheme? How could individuals and - even worse - non-for-profits and large funds of funds have place a very large portion of their assets -in some cases all their assets - with one money manager? Why did large international banks place billions of dollars entrusted to them by clients in a fund with which they didn't place any of their own assets? I fear that, once more, the main answer is unchecked greed. Retirees, trustees and fund managers thought they had found a safe way to invest their money conservatively and with an excellent and steady return without bothering to do any significant do diligence. Banks and middlemen made out like bandits by pocketing huge commissions to channel funds for management by Madoff. Rich people have become, overnight, candidates for soup kitchens and many charities have been forced to cease operations; however, the Madoff family, probably, has tens of millions stashed away in tax-heaven accounts and all those who collected commissions are happily living off their huge profits. Much of what has been lost is gone forever but it is still possible to recoup enough to recover, say, 10 or 15 cents on the dollar for all those who were duped. While a receiver is trying to sell Madoff's brokerage and trading businesses, authorities should repossess all payments made during the last five years to early investors in his fund using funds contributed by later investors, as well as all bonuses paid to management and employees just before the shit hit the fan. Furthermore, a concerted effort should be made to find and recuperate any hidden Madoff family funds and to realize as much as possible from the sale of Madoff's real estate assets. Finally, all those who collected commissions for channeling funds to Madoff - middlemen, international banks and funds of funds - should be forced to return this money to the appointed receiver; we are talking, probably, of billions of dollars. We have seen once more the nefarious effects of deregulation and non-enforcement of regulations that still exist. Anyone who manages other people's money should be checked annually by the SEC to ensure that it is done honestly, banks and funds of funds should be liable for not doing sufficient do diligence before investing funds that have been entrusted to them and the commissions paid for channeling money to a given manager or fund should be limited. Investment is always a risky business but fraud should not be part of the equation.

End Of An Era

We are living the end of an era: an era of non-discriminating deregulation, unchecked greed and a widening income gap, due to the rape of corporate profits by managements. This resulted in the impoverishment of the small shareholder and a reduction of the manufacturing labor force due, in part, to policies aimed at maximizing short-term profits to the detriment of the long-term health of companies. I have long been disgusted by management salaries and bonuses, awarded regardless of results, particularly in the finance business; however, I was shocked when I learned that in 2006 Merrill Lynch distributed in bonuses between $5 and $6 billion of its $7.6 billion profit. To add insult to injury, the profit was an illusion since much of it was unrealized and never realized. This perfect storm we are in is indicative of the total break-down of the system; much time and much pain will be requires to bring us out of this mess. Congress deregulated left and right without understanding what the consequencees would be; the auditing firms that were supposed to sound the alarm whenever a public company was in trouble became the public companies' co-conspirators; the boards of directors, that were supposed to keep management in check, give it long-term guidance and safeguard the interest of the shareholders, whom they are supposed to represent, became puppets of management and kept approving dizzying, unnecessary, unjustified and immoral salary increases and bonuses for the latter; rating companies overlooked obvious flaws insecurities they were greatly overrating; the SEC got caught sleeping on the job and failed to take action against rogue members of the brokerage and money management community, even when provided with clear evidence of their wrong doing; Fannie Mae and Freddy Mac started approving mortgages for lenders who couldn't afford them; the finance sector, using derivatives and securitizing bundled mortgages, created infinite liquidity for itself and literally pushed people to borrow - 125% mortgages were given - and get deeper in debt, penalizing them with absurd default interest rates and fees when they no longer could make timely payments. Now the country is bankrupt. The lower and middle classes are strangled by debt and at risk to lose their homes - those who have not lost them already; industry - not only the automobile industry - is paralyzed and downsizing because of the drop in demand and the difficulty in obtaining financing; retirement accounts have been almost wiped out and we are waiting for Obama to take charge as one waits for the Messiah. But Obama is not the Messiah; there is just so much he can do and he cannot do it very fast. Old regulations will have to be reinstated and new ones added. There should be some limitation to the salaries of executives: they shouldn't be raised in years when a company's revenues and profits have not grown and there should be some proportion between the highest and lowest salary in a company, like there is in Japan; bonuses should be distributed only out of annual earning and be limited to, say, 10% of earnings; share bonuses should not be vested for at least 7 years so that their value may be determined by a company's long-term growth and not by its short-term behavioron the stock ,market and so as to encourage good management to stay with a company, rather than move every few years to join a higher bidder. Auditors should not be allowed to serve companies in any other capacity; theyshould be fined for negligence and closed down if often unreliable. At least two thirds of each board should be independent and the board's mandate should be to act exclusively in the interest of the shareholders; financial institution should be disincentivized from lending money - it's not their money but that of their depositors - in too risky a fashion; finally, a government intent on deregulation should be obliged to carry out an in-depth study of all the possible effects of such deregulation, explain them to the public at large and have a referendum on whether or not to deregulate. These may seem draconian measures but man is, by nature, greedy and, as part of our general social contract, we should have a financial social contract as well. Capitalism is imperfect but is still better than any other system I know of; nonetheless, just as it would be impossible to play Monopoly - or any other game - without rules, so Capitalism as well must have a precise set of rules if it is to function and satisfy - more or less - all strata of society without risking to cause a revolution. We have a lot of rebuilding to do and, hopefully, we will never go back to the excesses of only a few months ago. The rich can get richer without the poor getting poorer; they needn't do it at neck breaking speed and, wwithin a set of well designed rules, Capitalism can thrive very well and it is in everyone's interest that it should. 

If It Seems Too Good To Be True It Usually Is

Just last night I was having dinner with a past executive director of the NYT. We were discussing Obama and his potential and I indicated that, to date, all of Obama's appointments and policy statements coincided precisely with my points of view. That, I said, made me weary and today, finally, I disagreed with his last decision. Arne Duncan may be acceptable to both opposite camps in education and he may have obtained excellent results within the Chicago school system but I believe that what was needed was a clearer message to the Teacher's Union that business as usual was over, that bad teachers would not be allowed to go on teaching and would not be rammed down the throats of Principals for reason of seniority and that huge sums - badly needed for educational purposes - would no longer be wasted to pay full salaries to teachers pulled out of their classes for child molestation and who, instead of being in prison, where they belong, sit on full pay in Department of Education buildings set aside to house them while they do nothing. Maybe an Arne Duncan, less treatening to the TU that a Joel Klein, will be able to obtain more concessions and make more headway in reforming our public education system and the TU; however, if he will not deal enrgetically with the problems at hand, we will be, by the end of Obama's term(s), a third world country as far as education is concerned.

Lucky Obama

Success requires, often, ability and hard work. Nonethless, I have always been convinced that its main ingredient by far is, always, luck. I think that Obama's presidency will be very successful since all the stars seem to be aligning just right for him. By the time he will be sworn in, on January 20th, the economy will be well on its way towards the bottom of the worst recession since the Great Depression; consequently, any President would be governing during four years of recovery, capital growth and reduced unemployment and could expect to be reelected, probably, by a land slide. But Obama, actually, seems to be putting in place an excellent plan and, should it succeed, we may, indeed, be on our way to decreased reliance on oil and availability of economically viable alternative energy sources. We should also have an improved infrastructure, a reasonably regulated finance industry and greatly improved relations with both friends and foe. As the saying goes, you make your own luck and Obama will have to make his; however, the elements for success are there and it will be up to him to make it or break it.